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We will derive a two-state call option value in this problem. Data: S0 = 110; X = 120; 1 + r = 1.1. The two possibilities for ST are 140 and 100.
a. The range of S is 40 while that of C is 20 across the two states. What is the hedge ratio of the call? (Round your answer to 2 decimal places.)
Hedge ratio:
b. Calculate the value of a call option on the stock with an exercise price of 120. (Do not use continuous compounding to calculate the present value of X in this example, because the interest rate is quoted as an effective per-period rate.) (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Call value:
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